Analysts suggest various measures to mitigate “lottery effect” of well-located HDB flats

In response to Minister Demond Lee’s statement, suggestions such as imposing a shorter lease and a longer MOP have come into talks on how to make BTO prices within prime locations more affordable. 

Property analysts offered various suggestions on how the government could mitigate the lottery effect of HDB flats in prime areas.

These include imposing longer minimum occupation period (MOP), shorter leases, resale buyer income cap and selling-back to HDB, reported The Business Times (BT).

The suggestions came after National Development Minister Desmond Lee, in an interview with Lianhe Zaobao, acknowledged the lottery effect of HDB flats located within prime areas, which may lead to a “likely windfall” for those who chose to resell their Build-to-Order (BTO) flats.

He noted that the government “do not want to have estates that are gentrified and that only the wealthy can afford to live (in)”.

As such, a series of other measures may be implemented to ensure that prices remain affordable once “resale is permitted for these flats”, said Lee, without providing details on the measures.

Analysts that spoke to BT noted that there are no simple answers since any measure will have wide implications considering that more than 90% of Singapore homeowners own an HDB flat.

To alleviate the lottery effect of such units, PropNex’s Head of Research and Content Wong Siew Ying suggested imposing a combination of a shorter lease of about 70 years and a longer MOP of around eight to 10 years, saying a shorter lease will help keep BTO prices more affordable. 

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“Subsequently, those looking to buy these flats on the resale market after the extended MOP would likely be more circumspect about paying a huge sum, given the limited capital upside due to the shorter remaining lease,” she said as quoted by BT. 

Aside from reducing the lease term from 99 to 50 years and increasing the MOP, Colliers International Research Head Tricia Song suggested enforcing a ceiling price, introducing an income ceiling requirement for the resale buyers, or all of the above.

However, she believes that such measures are not ideal in a free market and may involve more administrative manpower.

Song said there will be a lot of questions, such as “where do you cut off, or what is the definition of a prime location? Will the measures just be applicable to the Greater Southern Waterfront (GSW) or to other areas as well?”. 

Christine Sun, Head of Research and Consultancy at OrangeTee & Tie, on the other hand, suggested mandating owners to sell back prime flats to HDB, in order that there may be “some form ‘control’ over the resale prices and capital gains”, reported BT.

In concurring, Nicholas Mak, Head of Research and Consultancy at ERA Realty, said a “capital gains tax” may also be imposed. 

But while such tax may discourage property owners from flipping in the short term, it may not be effective in the long run, said Sumit Agarwal, Professor of Finance, Economics and Real Estate at the NUS Business School.

“What people don’t realise is that upgrading is not cheap,” he said, noting that as HDB flat prices increase, so too would private property prices. Hence, those upgrading to private property may find themselves incurring the same amount of debt or even more.

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Instead of imposing a capital gains tax, Song suggested increasing the resale levy for prime HDB flats.

Meanwhile, KF Property Network’s Head Evan Chung proposed adopting a tiered levy that is linked to the resale of prime flats, in which higher levies will be imposed for shorter years of ownership before the resale.

John Tan, Withers KhattarWong’s Senior Associate of Banking, Finance and Property, said the absence of capital gains tax has served as one of Singapore’s key attractions as a wealth capital and has “greatly contributed to the underlying value of Singapore properties as an investment class”.

As such, the implementation of a new regime should be carefully studied and designed so as not to discourage potential investors.

“This may also give rise to an increase in sophisticated wealth and succession planning… as parties are incentivised to explore tax-efficient holding structures to avoid hefty taxes payable when assets pass between generations,” Tan told BT.

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